The Step-by-Step Guide to Buying Your Very First Rental Property

Buying your first rental property can be exciting, confusing, and intimidating, especially if you’ve never done it before and aren’t quite sure what to expect.

To make the whole procedure a little less overwhelming, here’s a step-by-step overview of what the process looks like from beginning to end.

Note: This article is geared towards novice or beginner rental property investors who are interested in buying residential property (single-family residences or small multifamily) with a conventional loan.

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Before You Start Looking

Determine Your Budget

When it comes to owning an investment property, your budget involves more than just how large of a mortgage you can afford. In addition to monthly mortgage payments, you also need to keep in mind the ongoing costs of owning and renting out the property—utilities, maintenance and upkeep, taxes, etc.—and weigh that against how much you can realistically expect to collect in rent from your target tenants.

Do a search for comparable rental properties in the areas you’re considering, taking into account the size of the properties and the exact neighborhood(s) you’re of looking at. This will give you a better feel for what average rental prices people are willing to pay. Use some of the spreadsheets on BiggerPockets to calculate the cap rate, cash-on-cash return, and other factors.

Make Sure Your Credit Score Is in Good Shape

The higher your score, the better the interest rate you’ll be able to secure for a mortgage—and therefore, the less money you’ll pay over the lifetime of your mortgage. An ideal score is 720 or higher. Head over to www.annualcreditreport.com to request your credit report (you’re entitle to one free report each year from each of the three major reporting agencies) and scan it carefully to make sure there aren’t any errors.

If you see an error, report it immediately. If your score needs improving, you may want to spend some time working to get your score a bit higher before you start home shopping, i.e. paying down your balances, getting up-to-date with any late payments, etc.

Research Your Loan Options

The most common mortgage loan options are fixed-rate, which guarantee a fixed interest rate over the course of the loan term (typically 15 or 30 years) and variable or adjustable rate, which start off with lower payments that gradually increase over time.

As an income property investor, you likely plan to hold onto your property for a number of years, and you may want a predictable payment. If so, you may decide to opt for a 15-or 30-year fixed-rate loan.

A 30-year loan is your best bet if you wish to keep your mortgage payments low, while a 15-year loan will save you the most amount of interest over the lifetime of the loan in exchange for higher monthly payments, which can reduce your monthly take-home income from the property.

Look into Tax Credits

In addition to the state-specific tax credits available to all homeowners, landlords also enjoy tax benefits. Interest, repair costs, and other business overhead turn into tax write-offs, while upgrades, renovations, and the overall home itself turn into depreciation.

While you won’t need to worry about claiming these deductions until tax time, it’s good to be aware of them when you’re considering your overall budget and how affordable a home may be for you.

If you’re considering a major renovation, be aware of what expenses qualify as a deduction and what must be depreciated over time. This will make a large impact on your cash flow. Talk to a CPA if you have specific questions.

Shop for a Loan

Be sure to shop around for the lender that will give you the best rate. You don’t want to harm your credit score by making too many inquiries, but as long as you shop around within a 30-day timeframe, your credit score shouldn’t be too negatively impacted. Spend some time on the phone with different lenders to find one that’s easy to work with and willing to answer your questions, and ask friends, family, and your real estate agent for feedback on lenders they’ve had good (or bad) experiences with in the past.

During the House Hunt

Find a Real Estate Agent

Having the right real estate agent on your side is key, especially if you’re new to buying an investment property. They can help you identify homes with the best potential, keep you informed about average rental prices, and let you know about current trends in your area, such as up-and-coming neighborhoods.

Ask other local investors for recommendations. Conduct research on the internet and spend plenty of time talking with potential real estate agents to find someone who speaks your language and is on the same page as you.

Most importantly, make sure you’re working with an agent who has loads of experience serving buy-and-hold property investors. Don’t pick an agent who specializes in owner-occupants.

Find the Perfect Property

Remember that this is a business investment, not a personal one. Keep your own tastes out of it and think of what your target tenants are most interested in. Are you trying to attract active, single young professionals or families? Are you aiming for high-end or mid-range buyers?

Also think about how much work you’re willing to put into a property. If you’re a DIY lover, you could rehab an older home to appeal to renters who want charm and personality in a property. If you’d prefer to be more hands-off, look for a property that’s move-in ready. You’ll avoid the need to manage a rehab, and its age means you’re likely to have fewer repair calls from tenants in the beginning years.

Make the Offer

Ah, the waiting game!

This is where the most stress and nail-biting comes in for homebuyers and one of the many reasons it’s so important to have a trustworthy and experienced real estate agent on your side. With their prior experience and knowledge of the market, they can help you put together an offer (and counteroffer and counter-counter-offer if it comes to that) that best reflects the home’s value and your budgetary limits while still respecting the seller and showing them your interest in the property is serious.

They can also advise you on alternate negotiating tactics, such as requesting sellers’ concessions if the price becomes a sticking point.

Last Steps

The Appraisal

Once your offer is accepted, you’ll need an appraisal and home inspection. The appraisal will provide your lender with an estimate of the home’s current market value and will cost you approximately $300-$600.

When you receive your copy of the appraisal, have your real estate agent look it over to make sure the information reported matches up with comparables in your area. If the appraisal comes back at more than your offer, you’ve got instant equity in the property! If it’s lower, you can withdraw your offer (if it was contingent on appraisal), challenge it or attempt to renegotiate the contract—all of which are steps your real estate agent can walk you through.

The Home Inspection

The inspector will conduct a thorough visual examination of everything from the home’s exterior and interior to its plumbing, electrical, and HVAC systems and will alert you to anything that needs attention now (mold in the basement, out-of-code wiring, etc.) or may need attention in the future (a roof that’s on its last legs, an inefficient furnace, etc.).

You should always make your offer contingent upon the home inspection, knowing that it could reveal some potentially serious problems that may change your desire to buy the property altogether or cause you to amend your offer. If the home is in need of significant repairs and updates, you can go back to the seller to renegotiate a price reduction or ask the seller to fix certain issues before the home is sold.

The Closing Process

You’ve reached the home stretch! This step is probably the easiest step of them all, but it’s also one of the most tedious. Your attorney/real estate agent will let you know what documents you need to bring and will explain every document that’s presented to you for signing. Do some hand stretches to keep your fingers from cramping because you’re going to be signing an awful lot of paperwork.

Oh—and congrats! You’ve just purchased your first rental property.

Have any questions about the process? Want to share your experience buying a rental property?

Be sure to leave a comment below!

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About Author

Joshua and his brothers have worked as Atlanta real estate brokers for more than 15 years. As real estate investors themselves, they are experts in helping investors navigate the dynamic real estate landscape of the metro Atlanta and Decatur, Georgia area, particularly the Intown Atlanta neighborhoods. When Josh isn't following the Atlanta real estate market, you'll find him running, playing with his dogs, or hanging out with his family.

9 Comments

I am from Lae City in Papua New Guinea and tried to go into real estates business and through lack of knowledge was not successful. In 2007 I had a bank loan from nothing and operated a Hostel or Boarding house and later open up a section as a Guest house. To day I have been doing a lot of researching and trying ways to find the keys to success. With internet assistance through such venues I am beginning to check on myself what I was doing. I am grateful for such sharing of knowledge. Passingan Taru

Nice write-up Joshua. One thing I might add for the credit report piece is to also subscribe to a service that actually shows scores from the 3 credit bureaus. Many of these services (such as Identity Guard) give a 30 day trial period, so you can signup, see your scores and then unsubscribe if you do not want to continue the service.

Much appreciated. I think this gives a good high level approach to the process. I did have one question for you. With regards to the financing aspect of this deal, were you assuming a 20% down payment, as it would not be owner occupied up front? Thanks.